Are you interested in a real estate investment?

Many homeowners think of their home as an investment, and it is true that many owners who have owned their home for a long time have significant equity. In some cases, it is their financial nest egg.

There are a number of investments that can be made in real estate, including small residential investment properties that are not the owner’s primary home. With these properties, investors receive four investment advantages.

First, they receive rents, and in this area, the gross rents will often be 5 to 7 percent, and the net returns will be 4 to 5 percent.

Second, real estate generally appreciates in value, and nationally, the average appreciation has been 5.5 percent over a 47-year period. The combined rents and appreciation can provide an 8 to 10 percent return over time.

The third financial advantage is tax deductions, as the improvements to any buildings may be depreciated on your tax return over 27.5 years. Some losses may be deducted from your tax return, too.

Fourth, most small residential investments include a loan on the property, and when there is a financial return, the percentage of return compared to cash actually invested is higher. This is called leverage, and it simply means that if you invested $75,000 on a $300,000 investment, you are receiving an investment return on rents and appreciation based on $300,000. But only $75,000 was cash invested, so there is a higher net return on the amount invested. Many investors like the concept of having the renter making the mortgage payment, thus creating this higher return.

The combined return on investment on real estate investments often will generate more than other investment choices, such as certificates of deposit, bonds and the stock market. Many real estate investors also like the concept of owning a “hard” asset that has an intrinsic value that they can see and feel.

With the advantages come some disadvantages. Real estate is not easy to liquidate and sell, and it may take significant time to sell the investment. Real estate investments typically require a large down payment and a good credit history. The transaction costs of buying and selling may be high, and investments need to be held longer for the returns. There can also be issues with tenants that don’t make their rent payments or do not take care of the home, so good property management is a must. Maintenance and remodeling over time can affect the net investment return.

Many investors are surprised to learn that real estate can be held in a self-directed IRA, and it is possible to have real estate loans within an IRA. However, those usually have a low loan-to-value ratio, and cash reserves are a must, so the IRA needs to have a significant balance.

Don Ricedorff is a Realtor at The Wells Group in Durango and a past president of the Durango Area Association of Realtors. He can be reached at don@durangorealproperty.com.